MNI INSIGHT: BOJ May Consider 10-Yr Yield If Yen Hits 125 Fast

A problematic weakening of the yen which begins to undermine corporate profits and economic momentum could prompt the Bank of Japan to consider raising its 10-year yield curve control target from around zero percent, with a rapid move to JPY125 seen as a possible threshold for economic pain, MNI understands.

Any such move would be accompanied by reassurances from the BOJ that it is preserving its commitment to easy policy in line with its 2% inflation target, and it would stress that higher longer-term rates were key for maintaining the shape of the yield curve, its most important policy tool. It could cite financial and economic conditions, and the wording of any policy change would be closely scrutinised by BOJ officials to ensure there is no confusion.

While the BOJ, like other major central banks, does not target the exchange rate, a weaker yen would push up import costs and squeeze corporate margins. The BOJ only tends to respond to moves in the exchange rate or 10-year yields if they are abrupt or disruptive and has indicated that a slow move to 120 would not prompt a monetary policy response. There was little sign of concern over the yen this week from Governor Haruhiko Kuroda. (see: MNI STATE OF PLAY: BOJ's Kuroda Comfortable With Yen Fall.)

Dollar/yen has traded in a range from JPY105 to JPY115 for the past five years.

At the same time the outlook for higher prices in Japan has gained. Japan's inflation rate will likely rise to the mid-1% in fiscal 2022 as the impact of lower mobile phone charges on CPI wanes and as higher energy costs flow through.

Upward pressure on Japanese government bond yields has also built, as U.S. interest rates ratchet higher amid persistently high inflation in the U.S.

But the BOJ board review this week did not see the 2% target in reach and was cautious on the economic outlook. The impact of potential higher interest rates from the Fed was also brushed aside by Kuroda at this week's policy press conference.

Next week, a nationwide election for Japan's lower house on Monday is expected to see the LDP-led coalition of Fumio Kishida retain office comfortably. Kishida supports easy monetary policy and high fiscal spending to revive the economy.